6/12/2008 @ 12:20PM

Brownout

What happens when you don’t build more power plants? Get ready for spiking electricity rates, brownouts and even blackouts as demand soars

If you think runaway oil prices are upsetting, just wait for what’s in store for electricity. Similar forces are in play. Demand is rising fast; supply is not. The cost to get coal and natural gas out of the ground is going up, and to that expense must be added the cost of the carbon permits that Congress and the presidential candidates are contemplating. Environmentalists are getting power plants scotched. China is sucking up energy. Leave such dynamics in play long enough, and price spikes in electricity follow. But that’s just the beginning. We may be facing brownouts (voltage reductions) and even rolling blackouts.

By as early as next year our demand for electricity will exceed reliable supply in New England, Texas and the West and, by 2011, in New York and the mid-Atlantic region. A failure of a power plant, or a summer-afternoon surge in the load, could make for a blackout or brownout. “There really isn’t any excess in the system,” says Rick P. Sergel, chief executive at the North American Electric Reliability Corporation (NERC).

Price shocks are already occurring. In May, long before peak summer demand, the wholesale price of juice jumped twofold in Texas, to $4 per kilowatt-hour, 25 times the average retail rate in the country. Prices exceeded the allowed rate of $2 for seven days and threatened the viability of power resellers who contracted to deliver cheap rates to consumers. New Yorkers may suffer a summer of price discontent if regulators are right about peak wholesale prices jumping by up to 90%.

In the past few years, in dozens of utility regions such as Georgia, Louisiana and Ohio, price hikes have ranged from 20% to 80%. Overall, the cost of electricity, which declined (in real dollar terms) for the last two decades of the 20th century, has been relentlessly tracking up since 2001.

While oil gets the attention, America uses just 15% more of it today than when the first modern energy crisis hit in October 1973. But electricity use is up 115% since then, thanks to all those plasma screens, iPhones, computers and data centers. And all economic forecasts see substantial growth in demand for electricity–think just of the coming electric cars–yet lots of problems in meeting it.

Right now the nation has 760 gigawatts of power plants to meet current consumption, with another 154 in reserve capacity to maintain grid reliability. But in fact only 10 gigs is truly excess capacity. The other 144 is utterly essential to keep lights on when unexpected demand arises from heat waves, outages or maintenance downtime. That reserve will begin to shrink quickly. NERC estimates that over the next decade 135 gigawatts of new capacity will be needed to meet the growth in consumption. But right now plants producing a total of 57 gigawatts are planned.

Ninety percent of electric power is fueled by nonrenewable coal, natural gas or nuclear power. Renewable sources will not cover the growth in demand. While wind is gaining ground (and now supplies 1% of power), hydro’s share (7%) is shrinking as dams are dismantled. Solar, at 0.01%, is an inconsequential contributor.

Coal generates half of America’s electricity. The U.S. is the world’s second-largest producer. China is the largest, and used to be a net exporter. A year ago China became a net importer of coal. So U.S. coal exports are rising now, up 13% already this year. America has plenty of coal, but as exports grow its price will start tracking world coal prices. Those have more than doubled in the past year to $100 per short ton, and
Merrill Lynch
forecasts another near doubling by year-end.

Coal is cheap, but it has no friends. Anticoal activists brag that 59 coal-fired plants were canceled in 2007. Nearly 50 more in 29 states are being contested. Recall how the private equity buyers of Texas utility txu agreed last year to cancel eight power plants to defuse environmental opposition. It takes years to plan and at least six years to build a large power plant.

Also playing into this is the possibility of a carbon penalty. Whether taking the form of a visible tax or imposed through a cap-and-trade scheme, a $30-per-ton tax on carbon dioxide could propel a 60% to 150% rise in the cost of electricity, even without further price hikes in raw fuel, according to the Department of Energy.

Next, the favored hydrocarbon: natural gas, used for 20% of U.S. electricity. Natural gas prices seem on track to meet, and perhaps substantially exceed, previous peaks. The same problem here: Demand is up, but supply is not. Natural gas is largely a domestic fuel (as oil was decades ago). But U.S. production is falling because of environmental restrictions on exploration and tapped-out existing gas fields.

The savior was supposed to be a plentiful supply of liquefied natural gas imported from abroad via tankers. Good luck. Countries such as Japan and Korea are willing to pay 30% to 40% more than the U.S., so lng producers in Spain and India, for instance, are diverting shipments away from the U.S. David Ratcliffe, chief executive of the southeastern utility Southern Co., says he knows of times when a tanker loaded with lng was rerouted to a better-paying part of the world. Besides, relying on lng guarantees two things, neither good: more dependence on imported hydrocarbons and higher prices as the U.S. natural gas market gets tied to world prices. If we assume natural gas prices track oil’s, gas will double from today’s already high level.

Nukes produce 20% of U.S. electricity. But there hasn’t been a new nuclear plant started in three decades, and licenses are expiring on existing nukes. Opponents are fighting renewal of those licenses.

So how will this scenario play out if more plants don’t get built? The first thing is that utilities will burn more natural gas. There is excess capacity now in gas-fired electric generators, currently used for peak loads and for filling in gaps during maintenance and plant breakdowns. (Electricity has an unresolved, annoying feature–it cannot be stored in any useful quantities, and must be produced the instant it’s needed.)

But that margin of safety will disappear in only a few years, according to NERC. Electric rates, especially at peak times, will then soar–as much as tenfold. After that, we may see forced conservation, meaning voluntary or involuntary rationing, or even blackouts in rotation among business and residential customers. Utilities could give consumers the choice of staying cool by paying a lot more for the privilege.

Recall the summers of electric discontent for California in 2000 and 2001? Wholesale electricity prices skyrocketed, reflecting tight supply conditions (conditions that were exploited, but not created, by traders at Enron). The consequences were a bankruptcy filing by the state’s biggest utility,
Pacific Gas & Electric Co.
, and the early departure of a governor.

Multiply by dozens of states. Add in brownouts. Buy candles.

Mark P. Mills is a founding partner in Digital Power Capital, an energy tech venture fund, and writes the Energy Intelligence column for Forbes.com.